An update from our investment manager, Viktor Szabó - 22 July 2020
The coronavirus pandemic presented an unprecedented challenge to the Latin American region. While the speed and magnitude of the policy response varied by countries, mobility restrictions have been implemented on national or regional levels in every country, while monetary and fiscal policies have been eased to lessen the economic hit. As a result of the lockdown measures and a sharp drop in trade, tourism and capital flows the region is going through a period of deep economic contraction. Countries more exposed to commodities exports and tourism will be hardest hit, while those more oriented towards domestic consumption might look forward to a faster recovery. The gradual reopening of the economies is already underway, although several countries in region have not managed to get a grip on the spread of the coronavirus yet.
Central banks across the region have cut their policy rates and provided liquidity support to their banking sectors. We saw intervention in the foreign exchange markets, while several countries contemplated allowing central banks to support the local bond markets with direct purchases. New loan and refinancing facilities were introduced to help the corporate sector with financing needs. Meanwhile, the Federal Reserve has broadened its swap lines to include Brazil and Mexico, providing additional access to US dollars for these countries.
The fiscal response was also overwhelming, with special focus on protecting the most vulnerable households and companies and safeguarding jobs. Among other measures this includes direct cash handouts, tax deferrals, acceleration of tax refunds, broader unemployment coverage and government loan guarantees. Chile’s stimulus package is equivalent to 7% of GDP, while Peru’s total measures could reach 12% of GDP. Brazil plans to increase its primary budget deficit by 6.5% of GDP, while Colombia also announced an increase in social welfare programs and credit lines. The only notable exception is Mexico, where the administration was relatively slow to react to the pandemic outbreak, and still wants to maintain its original tight fiscal objectives, with only relaxation in healthcare spending allowed so far.
We remain cautious about the near-term outlook for Latin American equities as Covid-19’s impact on the global economy continues to unfold. The intensification of the pandemic, severe financial stress, border closures, country lockdowns and a temporary halt in business activities drags the region into recession this year. In Brazil, further progress in President Jair Bolsonaro’s reform agenda will be needed to bolster the country’s prospects. In Mexico, we expect more rate cuts in the coming months. Investors will also stay watchful over the outcome of Chile’s constitutional referendum, which has been postponed due to the viral outbreak, and whether the government’s stimulus measures can arrest slowing growth.
Despite these short-term uncertainties, we remain optimistic about the Fund’s long-term prospects, given the resilience of the underlying holdings. We will also continue to look for opportunities to select high quality stocks that are backed by solid fundamentals and long-term growth potential that aim to deliver robust yields.